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Dollar Surges to 16-Month High: 5 Domestic Picks

The dollar's surge and a strong U.S. economy would make domestically focused stocks better options

The U.S. dollar touched its highest level in nearly one and a half years on Nov 12 as investors anticipated another rate hike in December. Additionally, the pound and euro declined considerably. Concerns surrounding Brexit and Italy’s budget were the other major factors boosting the dollar against its major rivals.

Meanwhile, a number of indicators show that the U.S. economy remains on a firm footing. The dollar’s surge and a strong U.S. economy would make domestically focused stocks better options than their multinational peers. Adding such stocks to your portfolio makes good sense at this time.

Rate Hike, Brexit, Italy Budget Fears Drive Dollar

On Monday, the ICE U.S. Dollar Index gained 0.7% to hit 97.54 at 3:27 p.m. ET. Earlier during the day, it had climbed to 97.58, the highest level since Jun 23, 2017. The dollar staged a rebound after it declined at the end of the much-awaited mid-term polls. Investors felt that a divided Congress would reduce chances of further fiscal stimulus measures.

However, the Fed’s latest policy statement indicates that it will continue to raise rates as long as the economic recovery continues. Its current stance has hugely increased chances of a rate hike in December. Per CME Group's FedWatch tool, there is a 76% chance of the Fed raising rates after next month’s meeting.

Meanwhile, the euro lost 0.8% against the dollar to hit 1.12, its lowest level since June 2017. This was primarily due to growing strife in Europe over Rome’s budget proposals for 2019, which failed to receive approval last month. Further, concerns surrounding a no-deal Brexit led to the pound losing 0.9% to hit $1.28.

Economic Growth, Labor Market Remain Strong

U.S. GDP increased 3.5% in the third quarter. Notably, consumer spending increased at an annual pace of 4% in the third quarter. This is the sharpest pace of growth in consumer expenditure witnessed in around four years. Economic expansion remains robust and is unlikely to fall below 3% in the fourth quarter. (Read: GDP Growth Remains Solid in Q3: 5 Top-Ranked Picks)

Additionally, while job additions for October widely exceeded expectations, the unemployment rate remained flat at 3.7%, the lowest since December 1969. More notably, the year-over-year increase in wages increased from 2.8% to 3.1%. This is the fastest pace of wage increases recorded since early 2009. (Read: Wage Spike Seals December Rate Hike: 5 Picks)

Our Choices

With the Fed set to raise rates in December and worries in Europe unlikely to abate swiftly, the dollar is likely to crawl higher in the days ahead. In such an event, companies which conduct all their business within the United States are likely to be in an advantageous position compared to those with substantial overseas operations.

Domestically focused companies will gain further since GDP and the domestic job market are likely to remain strong. This is why it may be a good idea to pick such stocks. At the same time, selecting winning stocks is a difficult task.

This is where our VGM Score comes in. Here V stands for Value, G for Growth and M for Momentum and the score is a weighted combination of these three scores. Such a score allows you to eliminate the negative aspects of stocks and select winners. However, it is important to keep in mind that each Style Score will carry a different weight while arriving at a VGM Score.

We have narrowed down our search to the following stocks based on a good Zacks Rank and VGM Score.

Bridgepoint Education, Inc. BPI, along with its subsidiaries, offers postsecondary education services in the United States.

Bridgepoint Education has a VGM Score of B. The company’s expected earnings growth for the current year is 8.5%. The stock sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Humana Inc. HUM is one of the largest health care plan providers in the United States.

Humana has a Zacks Rank #2 (Buy) and a VGM Score of A. The company’s expected earnings growth for the current year is more than 100%. The Zacks Consensus Estimate for the current year has improved by 1.8% over the past 30 days.

Entergy Corporation ETR is primarily engaged in electric power production and retail distribution of power in the United States.

Entergy has a Zacks Rank #2 and a VGM Score of A. The Zacks Consensus Estimate for the current year has improved by 8.8% over the past 30 days.

Zions carries a Zacks Rank #2 and has a VGM Score of B. The company has expected earnings growth of 42.6% for the current year. The Zacks Consensus Estimate for the current year has improved by 3.2% over the past 30 days.

Monro, Inc. MNRO is a provider of tire sales and services and automotive undercar repair in the United States.

Monro carries a Zacks Rank #2 and has a VGM Score of B. The company has expected earnings growth of 14.3% for the current year. The Zacks Consensus Estimate for the current year has improved by 1.4% over the past 30 days.

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